It's decision day -- and we're not talking about NBA free agents, college recruits, and the like. We're talking about the Federal Open Market Committee (FOMC), which will be communicating a monetary policy decision at 2:00 p.m. ET.
Will the FOMC decide to cut the target range for the fed funds rate? We think not -- and so does the fed funds futures market. According to the CME FedWatch Tool, there is a 24.2% probability of a rate cut being announced today.
Will the Fed remove the word "patient" from its directive, tacitly signalling that it is leaning toward a rate cut at the July 30-31 FOMC meeting? We think so.
Will Fed Chair Powell at his press conference emphasize the Fed's willingness to act (i.e. cut rates) to sustain a near-record economic expansion? We think so.
The futures market is calm ahead of the FOMC decision, partly because it was pretty stoked yesterday at the idea that it will be hearing a dovish-minded Fed today.
The risk in front of today's meeting, then, is a Fed (and Fed Chair) that doesn't sound as dovish as the market would like it to sound, and specifically doesn't create a strong impression that there is a strong probability of a rate cut at the July meeting.
That is the risk, because the stock market has been richly rewarded since early June when Fed Chair Powell acknowledged that the Fed will "act as appropriate to sustain the expansion." That acknowledgment was quickly spun by the market as a signal that a rate cut is apt to be seen sooner rather than later.
The S&P 500 has surged 6.3% since June 3 and is flirting with a record high, so it is safe to say the market is expecting a friendly version of the Fed today. Yesterday's understanding that Presidents Trump and Xi will meet at the G-20 Summit later this month was just icing on top of a hopeful cake.
Accordingly, one shouldn't make much of a futures market this morning that is little changed -- not when the major indices rose between 1.0% and 1.4% on Tuesday.
The calmness is understandable, but more to the bullish point, there isn't any concerted selling interest after yesterday's strong advance and the even stronger advance seen since June 3.
This market is banking on monetary policy support, riding a wave of low interest rates, and squeezing short sellers out of the action and sidelined/underweighted money managers back into the market -- or so it seems.
On a related note, there was much ado yesterday about the Bank of America/Merrill Lynch Fund Manager Survey being the most bearish since the financial crisis. That revelation is regarded as a contrarian signal and the basis for the greater "pain trade" right now being rising stock prices.
The Fed decision will dominate the market narrative today, yet some corporate news of note includes a Q2 warning from U.S. Steel (X) that was attributed in part to softening end market demand, increased Q2 RASM guidance from Southwest Airlines (LUV) that was attributed in part to solid demand, Adobe Systems (ADBE) posting better-than-expected Q2 results, and Boeing (BA) reporting new orders for its 777 freighters.
The corporate items will spark some stock-specific reactions, but on a broader level, most investing decisions are being held in check in front of "the decision."